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Defending against Medicare contractor audits

April 2, 2012
by Andrew B. Wachler, Esq.; and Jessica C. Lange, Esq.
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Audit scrutiny targets SNFs in 2012
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Within the last few years LTC providers, specifically skilled nursing facilities (SNFs), have become an area of focus for audits by Medicare contractors. In fact, SNFs can expect an even higher level of attention this year than in the past. The Department of Health and Human Services (HHS) Office of Inspector General (OIG) issues an annual work plan that gives direction to the Centers for Medicare & Medicaid Services (CMS) as to where there may be problem areas which will require more audit attention in the coming year. The OIG list of potential problem areas has become known as the OIG “hit list.” This year, SNFs are on that hit list. 

CMS uses Recovery Audit Contractors (RACs) to audit Medicare providers’ claims post-payment. RACs have the authority to reopen claims submitted to Medicare by providers to identify over- or underpayments. RACs may review a case to determine if the claim was billed appropriately, and if the RAC determines that billing was inappropriate, recoupment can be ordered for overpayments to the provider. RACs conduct automated reviews and complex reviews.  

Automated review occurs only when there is an improper payment and it is done without review of the medical record.  Examples of automated reviews include an examination of duplicate claims or pricing errors. A complex review includes an analysis of the medical record and is conducted when there is a high probability of an overpayment. RACs can request copies of medical records and other documents from providers in the course of an audit to determine the medical necessity and appropriateness of billing. 

RACs are paid on a contingency fee basis, meaning that they are paid on the amount they recover. This payment structure motivates them to find improper payments. However, RACs may only audit the issues or areas of billing that CMS specifies on approved issues lists, which are updated regularly. Each RAC maintains a list of the issues approved for its review. A RAC will submit to CMS an issue it would like to review and CMS will review it and either add it to the approved issues list so the RAC may proceed with audits of that issue, or pass it on to a RAC Validation Contractor. After evaluating the issue, the RAC Validation Contractor will then issue a recommendation to CMS as to whether a full-scale review of the issue should be authorized. 

CMS also contracts with Zone Program Integrity Contractors (ZPICs) and Medicare Administrative Contractors (MACs). ZPICs audit cases submitted to Medicare by providers, focusing on program integrity. While RACs conduct medical review audits and focus on improper payments, ZPICs have the added responsibility of identifying suspected fraud.

MACs are another type of contractor that CMS uses to handle the processing and administration of both Part A and Part B claims. MACs’ functions include determining payment amounts, making payments, providing education, outreach and consultation services to institutions and agencies.


The OIG has identified ultra high therapy Resource Utilization Groups (RUGs) as an area for CMS contractors to evaluate closely. The 2010 OIG report, “Questionable Billing by Skilled Nursing Facilities” found that ultra high therapy billing increased from 17 percent of all RUGs in 2006, to 28 percent of all RUGs in 2008.  Payments for ultra high therapy RUGs increased from $5.7 billion in 2006, to $10.7 billion in 2008, a 9 percent increase. As a result of these findings, the OIG recommended that CMS increase the monitoring of SNFs. This year SNFs are on the OIG hit list.  

At this point, however, ultra high therapy RUGs are not on the CMS list of approved issues, but this does not mean that RACs will not be looking at them. SNFs, with a focus on ultra high therapy RUGs, are an area of attention in the 2012 OIG Work Plan, which means RACs will likely start paying closer attention to them. A recent development for ultra high therapy RUGs is CMS’ decision to allow the RAC for Region B, CGI Solutions and Technology, to request records and audit up to 10 “test claims” to determine if CMS should focus on that type of claim. The results of a test audit could possibly lead to ultra high therapy RUGs inclusion on the RACs’ approved issues lists. 

The indication from the OIG is that SNFs are frequently billing higher paying ultra high therapy RUGs when that may not necessarily be appropriate. The 2010 OIG report found that SNFs as a whole are billing for an increased number of higher paying RUGs, while the patient population has not changed. In a letter to one SNF, a RAC stated that the OIG found an “overwhelming majority of errors” in RUGs assignments by providers resulting in overpayments to SNFs. Medicare payments for therapy RUGs are nearly twice as much as for non-therapy RUGs.